1 answer

I’m so confused on this one because none of the answers make sense to me. I...

Question:

I’m so confused on this one because none of the answers make sense to me. I don’t understand how the equilibrium would decrease if the mortgage decreased and interest rate increased. Do supply and demand both shift or does just one shift? PLEASE GO INTO DEPTH.
1.) Assume that you are examining the housing market. In recent months, the equilibrium quantity of free-standing homes (not rental apartments) has decreased. Over the same period, the cost of materials used to build homes (arn input) has increased and the interest rate for homeowners that need to take out a mortgage has decreased. Considering only the aforementioned facts on a supply and demand graph, which of the following best explains the falling quantity of homes. A.) The demand curve for homes has shifted to the left more than the supply curve has shifted to the left. B.) The demand curve for homes has shifted to the right more than the supply curve shifted to the right. C.) The supply curve for homes has shifted to the right more than the demand curve shifted to the left. D.) The supply curve for homes has shifted to the left more than the demand curve has shifted to the right. E.) all of the above
1.) Assume that you are examining the housing market. In recent months, the equilibrium quantity of free-standing homes (not rental apartments) has decreased. Over the same period, the cost of materials used to build homes (arn input) has increased and the interest rate for homeowners that need to take out a mortgage has decreased. Considering only the aforementioned facts on a supply and demand graph, which of the following best explains the falling quantity of homes. A.) The demand curve for homes has shifted to the left more than the supply curve has shifted to the left. B.) The demand curve for homes has shifted to the right more than the supply curve shifted to the right. C.) The supply curve for homes has shifted to the right more than the demand curve shifted to the left. D.) The supply curve for homes has shifted to the left more than the demand curve has shifted to the right. E.) all of the above

Answers

There are two facts to be considered:

  • Interest rate is reduced so mortgage is now cheaper. Potential buyers will now find less expensive to pay mortgage for home so they demand more homes. Demand curve shifts right from DD1 to DD2. Quantity and price both are increased at new equilibrium
  • Cost of input is increased so supply should decrease. Hence supply curve should shift left from SS1 to SS2.

    Quantity falls and price rises at new equilibriim

  • Equilibrium shifts from 1 to 2.
  • It is given that equilibrium quantity considering both these shifts, has decreased from Q1 to Q2. This can happen only when supply shift is greater than demand shift.
  • This suggests that option D is correct

.

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